With the yield target recently discarded and the associated forward guidance tweaked, today's final RBA Board meeting for 2021 sees the focus turning to the economic recovery now underway from the Delta lockdowns. The decision statement from Governor Philip Lowe (due at 2:30pm AEDT) should confirm an unchanged policy stance (0.1% cash rate target and QE at $4bn/wk) and is likely to reiterate key recent themes: rate hikes are not on the radar in 2022 and that the QE program will be reviewed in February.
On the economy, the Board will feel vindicated in its earlier assessment that the winter lockdowns have delayed but not derailed the recovery. The 1.9% contraction in Q3 GDP turned out to be much less severe than the 2.5% decline forecast by Bank staff, and with restrictions easing key indicators on household spending, the labour market and mobility are all rebounding sharply. Supported by the high levels of vaccination in Australia, this momentum is expected to drive a robust rebound over the summer, albeit with the new variant an emerging risk. With the Board removing its 2024 guidance for rate hikes at the previous meeting, markets have pulled forward their expected start date for the hiking cycle into the second half of next year. This scenario has received direct pushback from the RBA and this is likely to be the case again today. As Governor Lowe outlined after the November meeting, hitting the 2-3% inflation target will require a labour market tight enough to be generating a "materially higher" pace of wages growth, a process that is expected to be gradual.
With regards to the QE program, the Board has already committed to maintaining purchases at the $4bn weekly pace through February when the next review will occur. There seems little need for anything new to be said on the matter today. The key factors in the February decision will be how the recovery progresses over the summer, the actions of other central banks with their QE programs, and overall bond market functioning. When the Board returns in 2022, it should (hopefully) have a far better handle on all of this than it does today.
